An estimated 40 percent of small businesses outsource payroll tasks to third-party payers, delegating the responsibility to withhold and pay over Federal employment taxes to the IRS. Unfortunately, some third-party payers withhold the tax through payroll, but instead of paying it to the IRS, they pay it to themselves! This scam may go undetected for a lengthy period of time before the employer becomes aware of the problem, particularly if the defrauding third party is sophisticated in presenting copies of documents that purport to prove the tax has been paid. Ultimately, when the IRS contacts the employer for the payment of tax, the employer suffers a great hardship because although the money was expended, the tax is still unpaid and due.
The Treasury Inspector General for Tax Administration (TIGTA) recently recommended that the IRS partner with the Bureau of the Fiscal Service to develop a plan to use the IRS’ electronic tax payment system to link third party payers with employers and establish a program allowing employers to inform the IRS of the third party payers they have authorized to file and pay taxes on their behalf. The third party payers would be identified to the IRS and would attach a Schedule R (Form 941) to employment tax returns. The IRS agreed with three of the five proposed changes. To read the complete report, click here.